collage of capitol dome with stars in a sepia version (Photo: Shutterstock)

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This is the final article in a series describing key provisionsof the SECURE Act, with a focus on provisions unique to definedbenefit plans. With the recent enactment of the CARES Act thatPresident Trump signed into law on March 27, 2020, it isunderstandable that employers are not focused on the numerouschanges implemented by the SECURE Act.

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However, some of its more immediate changesrequire employers to modify certain aspects of plan administration(and potentially financial planning decisions) to align with theAct's requirements.

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Some of the changes under the SECURE Act became effectiveimmediately on December 20, 2019, while others became effective inplan or tax years beginning on or after January 1, 2020. The Act provides for a remedial plan amendment period that does notend until the last day of the 2022 plan year (the 2024 plan yearfor governmental plans).  Therefore, employers generallyhave sufficient time to amend plan documents to comply with anyrequired or optionalchanges. And they need to understandthese changes to prepare themselves for the resulting effects.

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Here are provisions in the Act that are unique todefined benefit plans.

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1. Earlier in-service withdrawal age

The Further Consolidated Appropriations Act, 2020, whichincludes the SECURE Act, also includes the Bipartisan AmericanMiners Act of 2019. This sister legislation amends CodeSection 401(a)(36) to lower the age at which in-service withdrawalsmay be taken from defined benefit plans. Specifically, employersmay now allow in-service withdrawals at age 59½ (rather than age62).

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This is an optional change that employers can implement for planyears beginning on or after January 1, 2020. Employerschoosing to add such an option or to modify an existing planprovision will need to revise participant communications, noticesand forms to reflect the appropriate information.

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In addition, employers must adopt a plan amendment in connectionwith implementing or revising this withdrawal option.

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2. Increased age for beginning required minimumdistributions

Prior to the passage of the SECURE Act, plans were required tobegin making required minimum distributions (RMDs) by April 1 ofthe calendar year following the later of the calendar year in whichan employee attained age 70½ or the calendar year in which theemployee terminated employment.  The Act amends CodeSection 401(a)(9)(C) to increase this age to 72 —  arequired change.

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The increase in the required beginning date age applies toindividuals who reach age 70½ on or after January 1, 2020.

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An individual who attained 70½ prior to January 1, 2020, isrequired to begin RMDs under the prior rule. An individualwho reaches age 70 ½ on or after January 1, 2020, however, isrequired to begin RMDs by April 1 of the calendar year followingthe later of the calendar year in which the employee attains age 72or terminates employment.  (It is worth noting that whilethe CARES Act provides a waiver for RMDs that otherwise are due in2020, the waiver applies only to defined contributionplans.  The waiver does not apply to defined benefitplans.)

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The Tax Code also requires that if an employee continues to workafter he or she attains age 70½, a defined benefit plan mustprovide for an actuarial increase to his or her accrued benefit forthe period after age 70½ until the employee retires.

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The SECURE Act did not amend this portion ofthe Tax Code. Thus, the age at which a defined benefitplan must provide an actuarial increase remains 70½.

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In connection with the RMD rules, employers should updateparticipant communications, forms, and notices, including thespecial tax notice under Code Section 402(f), to ensure that suchmaterials accurately describe the new rules, and to ensure thatdistributions are treated appropriately for tax purposes.

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Plan amendments also must be adopted.

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3. Nondiscrimination testing and participation relief

As the cost of funding defined benefit plans has increased, manyemployers that sponsor them have taken action to limit futurebenefit accruals under them. Employers deciding to limit futurebenefit accruals generally do so in one of two ways,either: (1) closing the plan to any new participants, sothat participation is limited to a specific group of existingparticipants as of a specific date, who continue to accrue benefits— sometimes called a "soft freeze" or a "closed" plan; or (2)amending the plan to suspend any new benefit accruals for allparticipants —  sometimes referred to as a "hard freeze"or "frozen" plan.

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Both soft-frozen and hard-frozen plans can experience compliancetesting issues over time as the participant population becomesolder or decreases in size.  Thus, these plans may find itdifficult to satisfy the Tax Code's nondiscrimination and minimumparticipation requirements. The SECURE Act offers nondiscriminationand participation testing relief for certain closed or frozendefined benefit plans, subject to specific requirements.

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Benefits, rights, and featurestest:  A soft-frozen defined benefitplan limits future benefit accruals to a select group of"grandfathered" employees. Over time, the composition of the groupthat continues to accrue benefits may shift, so that it consists ofmore highly compensated employees. As a result, it becomesmore difficult for the plan to satisfy the Code Section 401(a)(4)benefits, rights, and features test.

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Under the SECURE Act, however, a defined benefit plan is deemedto satisfy the benefits, rights, and features test if: (1) the plansatisfied these nondiscrimination requirements in the plan yearthat it was closed and the two subsequent plan years; (2) the planis not later amended to significantly favor highly compensatedemployees (e.g., by modifying the closed class or changing thebenefits, rights, and features available to them under the plan);and (3) the plan was closed before April 5, 2017, or the plan didnot have a substantial increase in coverage or in the value ofbenefits during the five-year period before the closure date.

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Testing on benefit accrualbasis: Employers that sponsor both a definedbenefit plan and a defined contribution plan may aggregate thoseplans when performing nondiscrimination and coverage testing.

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Testing the aggregated plan as if it were a defined benefit plan(that is, on a "benefit accrual basis") sometimes improves thechances of satisfying these tests.

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However, current regulations make it difficult to use thisapproach.

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The SECURE Act allows an employer with a defined contributionplan and a closed or frozen defined benefit plan to aggregate theplans and test the aggregated plan on a benefits basis in somecases. The defined contribution plan generally mustprovide for contributions to make up (in part) for the loss ofbenefits the defined benefit plan participants expected to earnunder the closed or frozen defined benefit plan.  Thedefined benefit plan must; (1) provide benefits to a closed classof participants; (2) have passed the nondiscriminatoryclassification test for the plan year of the closure and the twosubsequent plan years; and (3) not be amended later tosignificantly favor highly compensated employees.

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In addition, the defined benefit plan cannot have a substantialincrease in coverage or in the value of benefits during thefive-year period before the closure date, or the plan must haveclosed before April 5, 2017.

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Minimum participationrequirement:  Closed or frozen definedbenefit plans may also have difficulty satisfying the Code Section401(a)(26) minimum participation requirements as participation inthe plan decreases over time due to death or retirement.

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Under the SECURE Act, a plan is deemed to satisfy the minimumparticipation requirement if it: (1) is amended to freezeall benefit accruals, or provide future benefit accruals to only aclosed class of participants; (2) satisfied the minimumparticipation test as of the effective date of the closure orbenefit freeze; and (3) was closed before April 5, 2017, or did nothave a substantial increase in coverage or in the value of benefitsduring the five-year period before the closure date.

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The testing relief described above is alreadyeffective.  Employers may elect to apply these provisionsto plan years beginning on or after January 1, 2014.

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4. Plan amendments and administrative changes

While the impact of the SECURE Act on defined benefit plans ismore limited than on other retirement plans, implementing theapplicable changes — required and optional — can be complex.

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As described above, plans generally must be amended to includethe mandatory SECURE Act changes by the end of the first plan yearbeginning on or after January 1, 2022. (For collectively bargainedand governmental plans, the amendment deadline is January 1,2024).

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Beth Miller is Of Counsel at Spencer Fane LLPin the firm's Overland Park, Kansas office.

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